Gold rallies on inflation talk

Gold jumped the most since September and oil exceeded $50 a barrel for the
first time in two months on speculation the Federal Reserve’s steps to spur
growth will revive demand for commodities as a hedge against inflation.

Gold futures in New York rose as much as $563.70, or 7.2 per cent, to $952.80 an ounce after the Fed said it would buy as much as $300 billion of U.S. government bonds, adding to the supply of dollars. Heating oil rallied 6.7 per cent, copper gained 5.4 per cent and aluminium advanced 3.8 per cent.

Gold rallies on inflation talk

“Money is being pushed into the system and that’s creating the inflationary threats that the markets are contemplating,” said Daniel Brebner, executive director of commodity research at UBS AG in London. “Commodities are a decent way to hedge against that potential threat. Real estate could be another.”

Before today, the UBS Bloomberg CMCI Index of 26 commodities fell 4.6 per cent this year as the global economic slump eroded purchases of cars, homes and other items that contain raw materials. Floor trading of most commodities was closed yesterday at the time of the Fed’s announcement.

Gold surged 6.8 per cent to $949.90 on the Comex division of the New York Mercantile Exchange as of 12.56pm in London. Trading closed before the announcement. Silver, platinum and palladium also gained.

The Fed kept its main lending rate at almost zero and may keep it there for an “extended” time. Central banks are lowering interest rates and spending trillions of dollars in response to the worst financial crisis since the Great Depression. That may devalue currencies and boost demand for gold as an alternative investment.